AT&T is doing exactly what it told Congress it wouldn’t do with Time Warner
AT&T’s decision to prevent Time Warner-owned shows from streaming on Netflix and other non-AT&T services reduced the company’s quarterly revenue by $1.2 billion, a sacrifice that AT&T is making to give its planned HBO Max service more exclusive content. AT&T took the $1.2-billion hit despite previously telling Congress that it would not restrict distribution of Time Warner content, claiming that would be “irrational business behavior.”
AT&T’s actual Q4 2019 revenue was $46.8 billion, but the company said it would have been $48 billion if not for “HBO Max investments in the form of foregone WarnerMedia content licensing revenues.”
An AT&T spokesperson told Ars that the $1.2 billion in lost revenue was primarily caused by the decision “not to sell existing content—mainly Friends, The Big Bang Theory, and Fresh Prince—to third parties such as Netflix.” As we’ve previously reported, AT&T took Time Warner shows off Netflix in order to give the exclusive streaming rights to AT&T’s HBO Max, which is scheduled to debut in May 2020 for $14.99 a month.
“We made the strategic decision to give HBO Max exclusive streaming rights for top programs, including Friends, Big Bang Theory, and other popular shows. In the past, we would have sold these externally,” AT&T CFO John Stephens said in an earnings call.
The amount of forgone revenue could grow in future quarters, as Friends just left Netflix on January 1. The Big Bang Theory and Fresh Prince were not on Netflix in the United States, so in those cases the forgone revenue is apparently from not entering into licensing deals instead of ending them. AT&T also pulled Pretty Little Liars off Netflix in mid-2019 in order to give HBO Max the exclusive streaming rights.
AT&T in 2016: “It would be irrational”
AT&T won a court case allowing it to complete its purchase of Time Warner in June 2018 after telling Congress that it wouldn’t do exactly what it is now doing with Time Warner-owned shows.
In December 2016, AT&T CEO Randall Stephenson told a Senate antitrust subcommittee that AT&T would continue to distribute Time Warner content as widely as possible instead of restricting it to AT&T’s own platforms:
Nor is there any reason to believe we could use Time Warner programming or AT&T networks to hurt related markets. Simply put, it would be irrational business behavior to do so. Time Warner’s programming is more valuable when distributed to as many eyes as possible. Moreover, in order to have great programming, it is imperative that we attract great creative talent to develop it. The best way to attract that talent is through widespread distribution of Time Warner content.
Time Warner business “depends on licensing”
AT&T made similar claims to a federal judge in the court case in which AT&T defeated the Department of Justice’s attempt to block the merger. The claims in court filings were more narrowly limited to content owned by Turner Broadcasting, one of the main pieces of Time Warner along with HBO and Warner Bros. (Friends, The Big Bang Theory, Fresh Prince, and Pretty Little Liars are all Warner Bros. shows.)
In a May 2018 court filing, AT&T claimed that the “real-world economics of the programming business” disproved the DOJ’s case that AT&T would withhold video content from other distributors in order to boost its own TV services:
Turner’s entire business depends on licensing and advertising revenues, and those revenues in turn depend on broad and uninterrupted distribution of its programs. Whatever revenues AT&T would earn from the tiny percentage of subscribers AT&T [TV services] might gain if Turner went dark on a rival distributor would be vastly outstripped by the licensing and advertising revenues Turner would lose. Turner, accordingly, would no sooner walk away from this “kabuki dance” after the merger than before—and everyone knows it.
AT&T court filings also touted its binding promise to use “baseball-style” arbitration to settle any licensing disputes over Turner content with distributors. While that pledge will restrict AT&T’s behavior with Turner, AT&T’s treatment of Friends and other Warner Bros. shows seems to contradict Stephenson’s claim to Congress that “Time Warner’s programming is more valuable when distributed to as many eyes as possible.”
AT&T also raised prices of its TV services multiple times after saying in a court filing that buying Time Warner would “enable the merged company to reduce prices.”
Warner Bros. revenue dropped 8 percent
AT&T said its Warner Bros. quarterly revenue was $4.1 billion, down 8 percent year-over-year partly due to the decision to give up licensing revenue from Netflix and other streaming services. AT&T’s Turner division—which is subject to the arbitration promise—had quarterly revenue of $3.3 billion, “up 1.6 percent year over year due to a 3.1 percent increase in subscription revenues and a 7.3 percent increase in content licensing and other revenues, partially offset by a 2 percent decline in advertising revenues.”
Giving up $1.2 billion in quarterly revenue is apparently worth it to AT&T because of how crucial HBO Max is to its TV plans. In addition to buying Time Warner for $85 billion, AT&T purchased DirecTV for $48.5 billion in July 2015. But the company’s TV business has cratered, with AT&T losing more than 4 million customers from its satellite, wireline, and linear streaming-TV services in 2019.
HBO Max, which will bring HBO content together with other Time Warner video, including shows formerly available on Netflix, is supposed to solve AT&T’s TV woes. AT&T says it’s aiming to get 50 million US subscribers within five years for its Netflix-style service—and exclusive streaming rights to shows that would otherwise be on Netflix will be a big part of AT&T’s pitch to customers.
